Pay rises are a plus for the economy



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Wages across Europe have been suffering much in the aftermath of the Great Financial Crisis. Before the crisis, nominal wages were increasing at a rate of 3 to 3.5%. Since then wage dynamics have substantially come down.

What explains this weakness in wages? One factor is of course the crisis itself and the high and persistent unemployment that was caused by it, thus weakening the bargaining position of trade unions and workers. Another key factor however is policy. Policy makers embarked on structural reform of wage formation systems with the aim of weakening or even dismantling all sorts of institutions and mechanisms that work to back up wages and collective bargaining. This became known as an “internal devaluation” of wages.

If we want to turn the tide and if we want to give workers in Europe a pay rise, then we need to get the message across that squeezing wages is bad policy and that the opposite is required: More robust wage increases assist the economy to perform better.

The attached paper describes the reasons why pay rises are a plus for the economy